A century of mixed governmental policy and clever corporate maneuvers has delivered a U.S. telecommunications market devoid of competition. In most cases the cost of entry in the broadband internet market is prohibitively high. (Source: Parker Brothers)

FCC Chairman Julius Genachowski today will hold a public meeting to discuss the rough draft of net neutrality rules to try to regulate this unruly market. (Source: AP Photo/Danny Johnston)

Sen. John McCain and Washington Republicans have opposed the measure, but may be powerless to stop it. The telecom industry has donated or fund-raised millions in campaign contributions to McCain and others in a bid to secure their opposition of net neutrality and other restrictions. (Source: AP/Zimbio)

Under the FCC's new rules "legal" traffic will be protected; though their are significant exceptions for wireless

The
U.S. Federal Communications Commission will today hold
a public meeting to discuss its draft of new internet rules
and regulations. The proposal, drafted by FCC Chairman Julius
Genachowski, represents a relatively moderate approach and thus may
draw fire from both strong net neutrality advocates and industry
officials alike.

I.
What's in the Draft

The
draft is all about protecting an "open" internet. It
forbids internet service providers, such as Comcast or Time Warner,
from throttling
(slowing) legal traffic. It also would likely outlaw plans,
such as the pay-per-site
scheme unveiled by wireless providers this week.

The
rules have a number of exceptions, though. Wireless carriers
are allowed to throttle certain kinds of traffic (e.g. video),
assuming they are not using that as a tool to promote their services
in an anticompetitive fashion (i.e. the proposal permits them to
"reasonably" manage traffic). And while they may have
to prove it's illegal, wired and wireless operators are allowed to
throttle illicit traffic, such as P2P or bittorrent traffic of
pirated materials.

Those limitations may bother some net
neutrality advocates. The mobile provision is particularly
worrisome to companies like Google who are becoming increasingly
reliant on mobile advertising and peddle a variety of high-bandwidth
products (like YouTube).

While the outlook is good for video
and voice services (e.g. Skype, YouTube, and Hulu) in the wired
domain, trouble could show its face their as well. The proposal
permits wired carriers to adopt
usage-based pricing, as many are eager to do.

Usage-based
pricing is a mixed bag for the public. For "low tech"
internet users, who only check their email and read text-heavy pages
like Wikipedia or The
New York Times,
their bills will likely be reduced. But for "high-tech"
users who video chat on Skype, stream movies from Netflix, or play
online games they may soon see their bills skyrocket.

The FCC
promises to monitor the markets for what it sees as abuses.
But the question is whether the Commission will act in time to
prevent such abuses before they
happen and whether its rulings will even hold up in court, given the
fact that they're loosely defined in existing and pending regulation
guidelines.

II.
Rise of the Collective Monopolyi.
The Past

Between
1934 and 1996 the internet popped up, cell phones became fashionable,
and the telephone marketplace radically changed. However, there
was precious little new regulation to guide this new market.

And
the root of the problem began long before that, even.

In the
1880s and 1890s, the Bell Telephone Company enjoyed a monopoly on
telephone services in the U.S., thanks in part to the the United
States defending its patent on the phone. Those hoping to
construct their own systems of phone lines first had to pay to
license the Bell patent , and then had to navigate through a myriad
of government restrictions designed to help Bell.

Under the
system few legitimate competitors to Bell arose, and those that did
were quickly acquired by Bell before they came a nuisance.

In
1899 the American Telephone and Telegraph Company (AT&T)
acquired, Bell. The net effect was to assign a new name and
owners to the national monopoly.

A similar monopoly was
developing in the wireless industry, with wireless giant RCA stomping
out the competition. Together RCA and AT&T held the
critical patents on vacuum tubes. And in the 1920s they agreed
to a cross-licensing agreement that would essentially make them
America's exclusive source of transmitted information over the next
three decades.

In the 1960s and 1970s court rulings slowly
chipped away at AT&T's domination of the market, by allowing
third party devices and their ilk to connect. And then a
landmark decision in 1974 -- the United
States v. AT&T --
force the AT&T monopoly to split into smaller companies.

Slowly
many of these telephone companies began to merge back together,
reducing the total number of options.

At the same time as all
this was occurring, a handful of cable television companies (Cox,
Time Warner, and Comcast) emerged and cornered the small, but
increasingly lucrative paid television market. Eventually some
of these firms would be acquired by the telecoms and vice versa.

In
1996 U.S. President Bill Clinton passed the Telecommunications Act,
the first major telecommunications legislation since the
Communications Act of 1934, which established the FCC. Among
other things, the new law required telecoms to interconnect their
wired networks (wireless networks could still operate
independently).

ii.
Today

Today
a handful of companies largely control the wired and wireless
internet in the U.S. There are only four major wireless
carriers, and only eight cable networks with a million subscribers or
more.

Cable services tend to be what economists refer to as an
inelastic good. While providers make their decisions
"independently" they tend to adopt common pricing in a
particular region, and have in effect an unlimited supply.

The
cost of market entry is prohibitively high for small competitors to
emerge. Even with the ability to connect to their competitors
wired lines, the infrastructure costs associated with launching a
cable network to cover over a million people make it virtually
infeasible for all but the biggest financial powers.

The
question becomes how to regulate a competition-devoid industry that's
essentially behaving as a collective monopoly and ever looking for
ways to milk more money from customers. That FCC has largely
been saddled with that responsibility.

Many today, however,
are unhappy with this state of affairs. After all, they say,
the government put us in this mess by promoting early cable,
telephone, and wireless monopolies -- so what makes us think that
they will get us out of it with more regulation?

Adding to the
difficulty faced by the FCC and pro-regulation members of Congress,
is a wealth of campaign donations from the industry's biggest
players. These donations have helped convinced some states to
propose laws to effectively ban
cheaper municipal Wi-Fi offerings -- an emerging alternative
to big cable. They also have lead politicians on the national
scale to fight against new regulation on net neutrality and other
topics.

The question, however, becomes -- if Congress and the
FCC can't (or are unwilling to) extract the nation from the service
providers ever tightening web of rising prices, who can?

III.
The Outlook for the New Rules

The
FCC faced contention in its own ranks, when debating Chairman
Genachowski's proposal. Commission members Michael Copps and
Mignon Clyburn only reluctantly gave their approval to the draft,
while expressing misgivings about its exemptions for the wireless
industry and various loopholes. Mr. Copps commented, "While
I cannot vote wholeheartedly to approve the item, I will not block it
by voting against it."

The two votes from Mr. Copps and
Ms. Clyburn gave the Commission a 3-2 vote, clearly split along party
lines. The two Republicans have both opposed
the bill. Commissioner Robert McDowell, one of the two
Republican members of the Commission commented in a WSJ
interview,
"Nothing is broken and needs fixing. Ample laws to protect
consumers already exist."

Some industry analysts have
praised the draft. States Daniel Ernst, an analyst at Hudson
Square Research, in an interview with Reuters,
"Without regulation, rates could go up and up and up and
emerging providers like Netflix and Hulu could have problems
attracting users."

However, the proposal, as mentioned,
is drawing the ire of some net neutrality groups as being too weak.
Craig Aaron, managing director of Free Press, criticized the bill's
many loopholes and lax restrictions on the wireless industry,
stating, "These rules appear to be flush with giant
loopholes."

These advocates argue the FCC is abandoning
its responsibility to protect the public and bowing to corporate
influence.

While the bill clearly won't fully satisfy
everyone, it does provide some barriers towards the
anticompetitive/anti-consumer behavior that the telecommunications
market has increasingly been experimenting with. Thus some see
it as a modest step towards preventing telecoms from abusing their
artificially dominant position.

“And I don't know why [Apple is] acting like it’s superior. I don't even get it. What are they trying to say?” -- Bill Gates on the Mac ads